REX

Business Context and Reporting Period

Company: REX Stores Corporation (REX American Resources Corp)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Quarter and six months ended July 31, 2000

Business Overview: A leading specialty retailer in the consumer electronics and appliance industry, operating 242 stores in 36 states under the "REX" trade name. The company focuses on small to medium-sized markets.

Key Financial Metrics

Note: Debt figures include $46.4 million in notes payable and $51.9 million in long-term debt obligations as of July 31, 2000.

Material Changes vs. Prior Period

• Revenue: Net sales for the quarter decreased 5.7% to $101.6 million compared to $107.7 million in the prior year. This was driven by a 12.8% decline in comparable store sales, partially offset by the addition of 16 new stores. For the six-month period, sales increased 1.0% to $208.8 million.
• Comparable Store Sales: The decline was primarily attributed to unseasonably cool weather in the Northeast and Midwest, which reduced air conditioner and appliance sales by 15.5% in the quarter. Excluding appliances, comparable store sales would have increased 4.5%.
• Profitability: Net income for the quarter decreased 2.9% to $4.0 million. However, net income for the six-month period increased 16.8% to $7.2 million, largely due to significant income from limited partnerships ($4.4 million for the six months vs. $0.8 million prior year).
• Expenses: Selling, general, and administrative (SG&A) expenses increased 1.3% for the quarter and 4.6% for the six months, driven by advertising costs for new stores and increased media spending. Interest expense rose due to higher borrowings to fund inventory and stock buybacks.
• Cash Flow: Net cash used in operating activities was $24.3 million for the six months, a significant increase in usage compared to $0.6 million in the prior year. This was primarily due to a $41.9 million increase in merchandise inventory.

Guidance, Outlook, and Risks

• Store Expansion: Management plans to open 30 to 35 new stores for fiscal 2000, with anticipated capital expenditures of $25.0 to $30.0 million. Funding is expected from operations, investments, and additional mortgage debt.
• Stock Repurchases: The company purchased 1.79 million shares for $33.1 million in the first half of fiscal 2000. Subsequent to the quarter end, an additional 406,800 shares were purchased, and the board authorized an additional 1.0 million shares.
• Liquidity: As of July 31, 2000, the company had $46.4 million outstanding on its line of credit, with approximately $69.9 million available. The current ratio declined to 1.5 to 1 from 2.3 to 1 at the beginning of the fiscal year.
• Risks and Contingencies:
  • Weather Sensitivity: Appliance sales, particularly air conditioners, are highly sensitive to weather conditions, as evidenced by the current quarter's performance.
  • Partnership Income: A significant portion of recent income is derived from the sale of interests in limited partnerships producing synthetic fuels. Future cash flows from these sales are contingent on federal income tax credits.
  • Inventory Levels: High inventory levels ($181.2 million) pose a risk if sales do not recover, particularly in the appliance category.

Investor Verification Checklist

• Inventory Turnover: Verify the ability to sell the $41.9 million increase in inventory, particularly air conditioners, given the weather-related sales decline.
• Debt Servicing: Confirm the company's ability to service the increased debt load ($98.3 million total) given the negative operating cash flow of $24.3 million for the six-month period.
• Partnership Income Sustainability: Assess the reliability of the $4.4 million income from limited partnerships, noting it is largely non-recurring or contingent on tax credits rather than core retail operations.
• Comparable Store Trends: Monitor if comparable store sales can recover in the appliance category as weather patterns normalize.
• Capital Expenditure Funding: Verify the availability of the remaining $69.9 million credit line to fund the planned $25-$30 million in store openings.